Is Nvidia Overvalued? A Fundamental Analysis

After a 240% surge in the past 12 months, many investors ask the same question … is Nvidia overvalued? On the one side, investors already owning NVDA 📈 ask themselves whether to keep on to it. On the other side, investors that have stayed on the sidelines so far wonder whether it’s too late to get in.

Applying fundamental analysis to determine whether Nvidia is overvalued

To clear the fog, this article lays out how to look at NVDA in fundamental analysis. The good news is that fundamental research bears out a very straightforward answer.

Price/Sales ratio close to all-time high

Looks can be deceiving. A look at Price / Sales, one of the most basic valuation ratios, suggests an affirmation of the question at hand: is Nvidia overvalued. The Price / Sales ratio reflects how much you have to pay per $ of sales to own the stock. At around 40x Price / Sales, NVDA 📈 is among the most expensive companies out there. As recently as in Q3 2022, NVDA’s Price / Sales ratio stood at just 10x before taking off to reach a high of 45x only 9 months later.

If we stopped our analysis here, the natural conclusion would be that NVDA shares are prohibitively expensive. But the key to determining … is Nvidia overvalued by the market or not is elsewhere.

Next stop: The bottom line

Revenue can be “bought” in many different ways by a company to achieve strong revenue growth. A company can spend heavily on marketing or undercut the market with low prices. In both cases, this comes at the cost of its  bottom line. So let’s take a closer look at the trend in Nvidia’s bottom line.

Exponential profit growth

In Nvidia’s case, a quantum leap in conversational AI combined with strong product leadership has led to an explosion of Nvidia’s net profit growth – at a scale that is unlike anything the market has seen. It literally exploded from $0.6bn in Q3 2023 to over $12bn in just 5 quarters, driven by ultra-high demand and massive margin expansion.

Fiscal yearend: January.

Massive margin expansion

Nvidia’s leadership position in the market for graphics processing units (GPUs) has enabled it to benefit tremendously from the surge in excitement and ensuing investment in AI technology that started in late 2022.

The company’s lead in the industry is so dominant that it can charge exorbitant prices. As a consequence, Nvidia’s EBITDA margin grew from 20% in 2023 to close to 60% in 2024. With this insight, we are closing in on the answer to those queries out there asking is Nvidia overvalued.

To put things in perspective, as recently as in 2021 and 2022, Nvidia had already been a beneficiary of a massive trend. Back then, the company was benefiting from the hype in cryptocurrencies, and the accompanying search in demand for its GPUs. At the time, however, its EBITDA margin “only” reached 40%.

Mind-boggling profitability

The processing performance and efficiency of Nvidia’s GPUs is unrivaled in the marketplace. By meeting this core requirement for training AI models better than any other company in the market, Nvidia basically gets to dictate pricing to its customers.

Add to that the fact that investments in research and industry relationships have built the basis for massive economies of scale, and you get a profit machine. An already attractive return on assets of 27% in 2022 is expected to grow to over 100% in fiscal year 2026, i.e. in the not so distant future by 31 January 2026.

An ROA in excess of 100% – whereby net profit exceeds a company’s total assets – is virtually unheard of. By way of comparison, Accenture, a consulting firm with limited physical assets, reported a return on assets of just 14% in 2023.

Looking at valuation relative to earnings to determine is Nvidia overvalued

At the time of this writing, Nvidia’s Price to Earnings ratio stands at 76x. Looking at this number, inexperienced investors may jump to the conclusion that Nvidia’s stock is egregiously expensive.

In reality, the market prices in future earnings. Based on projected net profit in 2025, 2026 and 2027, Nvidia’s price to earnings ratio quickly drops to 40x, 30x and 25x. When factoring in that analysts have consistently underestimated Nvidia’s net profit in recent quarters, these PE ratios may very well trend lower.

Growth vs. valuation: The PEG ratio

A great metric to put valuation in perspective with earnings growth is the Price/Earnings to Growth (PEG) ratio. The PEG ratio is calculated by dividing a stock’s P/E ratio by its earnings growth rate. The resulting ratio helps an investor determine whether a stock is undervalued or overvalued, in this case is Nvidia overvalued.

A PEG ratio of around 1 is generally interpreted in a way that the stock is valued fairly in relation to its expected earnings growth. Nvidia’s PEG ratio based on 2027 earnings is 1.25x.

The verdict. Is Nvidia overvalued?

The findings of our fundamental analysis indicate that Nvidia is currently fairly valued. P/E ratios of 30x and 25x for 2026 and 2027 are justifiable for a company of this level of quality. Even more so, as chances are that earnings will continue to surprise on the upside. Similarly, a PEG ratio of 1.25x seems fair.

Where will the stock go from here?

Being fairly priced, the stock’s trajectory very much depends on the company’s execution. Can it maintain its pricing power? Can it further boost its economies of scale? And, can it beat analyst expectations quarter after quarter?

The next earnings calls will deliver new data points.

Some pundits may correctly point to the fact that the computer chip industry has historically been a very volatile industry. So can we say this time it’s different?

We believe this time is indeed different. There is no need for Nostradamus’ crystal ball to tell us that demand from AI companies and data centers is real and structural. This demand is not going to fall away like the demand for GPUs by the cryptoindustry after the boom years of 2021 and 2022.

Nvidia now has a diversified revenue stream stretching across AI, data centers, and autonomous vehicles all the way to gaming and cryptocurrency mining.

PS. This article was not draft without the help of AI. We did ask ChatGPT, however, for its opinion, asking it is Nvidia overvalued. Contrary to us, it did not offer up an assessment. Rather, it played it safe by writing “For the most current and detailed analysis, consulting financial news sources, analyst reports, and market analysis platforms can provide up-to-date insights and expert opinions on NVIDIA’s valuation.”

Important notice:

This article is not to be understood as a recommendation to buy or sell. Please conduct your own research before making investment decisions. To this end, we aim to provide you with the best portfolio management tool and investment research data possible. However, we cannot guarantee the accuracy of this information in spite of our extensive efforts to ensure that the data is complete and 100% accurate.